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ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION

Assignment Stage 2 (ASS#2): Restated Financial Statements & Ratios

ACCT11059 – Accounting, Learning & Online Communication

Student: Aida Pita

Student Number: 12053642

Due date: 5th June 2017

Blog: https://aidasblog2017.wordpress.com

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https://aidasblog2017.wordpress.com/


STEP 7: VARIABLE COSTS & CONTRIBUTION MARGINS

Credit Corp Group is a company that provides customers the opportunity to maintain the control over their financial situation by working flexibly and providing affordable and convenient repayment solutions. They do this by considering customers circumstances and assist them by designing a repayment plan. Credit Corp Group provides many services in regards to these repayment plans and offers sustainable, affordable finance products with market-leading fees and rates.

Note: Credit Corp Group refers to their services as ‘products’

The products Credit Corp Group provide are:

1. Wallet Wizard: The first product Credit Corp Group provides makes borrowing simple and fast. Through Wallet Wizard, individuals can apply for a Smart Loan from $500 to $5,000.

2. Credit 2 u: The second product Credit Corp Group provides is approving car loans through Credit 2U. Credit 2U is a car finance broker where individuals may avoid spending time shopping around and marketing credit files by doing multiple credit inquires with different lenders. Basically, this product recommends a suitable lender within the lending panel, which offers a range of solutions including leases and personal loans.

3. Clear Cash: Credit Corp Group provides a different approach to accessing cash online through Clear Cash. Their online decision engine assesses an individual’s financial situation and works out what they can pay and alters a credit limit and period designed for the individual.

I selected the above products, as I believe they are useful to many individuals who are in need of an affordable convenient repayment solution. Furthermore, I am interested to find out how these products contribute to the profitability of Credit Corp Group.

After researching background knowledge into these three services, I discovered that all services have a limit on the repayment period, an interest rate and annual fees. Additionally, for each service repayments may be made either weekly, fortnightly or monthly. Furthermore, I discovered the price charged depends on the interest rate. The interest rates for each service are:

Credit 2U: 12.99% Wallet Wizard: 47.8% Clear Cash: 47.8%

The interest rates for Wallet Wizard and Clear Cash seemed to be extremely high and unrealistic. However, as I took my research further, I realized they have these high rates as their additional smart loan fees for Credit limits are all $0.These fees can be seen in the following table below and are fixed.

Smart Loan Fees for Credit Limits of:1. $500 -$5,000 for Wallet Wizard2. $500 - $3,000 for Clear Cash

Annual fee $0Service fee $0Credit Limit Increase fee $0Manual Payment fee $0

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Additionally, the application to borrow money from these two services is very fast as individuals applying can receive their cash within 60 minutes of approval if the contract has been accepted before 2:30pm Sydney time on a business day. Thus, those who need to borrow money in an emergency situation will ignore these high fees. Furthermore, Wallet Wizard and Clear Cash allows anyone to apply for fast cash. On the contrary, Credit 2U who has an interest rate of 12.99% carefully look through financial situations individuals are in and their income to provide a possible repayment option.

For step 7’s case, lets assume that an individual wishes to borrow a personal loan $5,000 and can repay it monthly using either one of these services over a loan period of 1 year. The price per service as outlined on the website depends on their interest rates and is as follows:

1. Credit 2U: Individuals will pay a regular payment of $447 per month at 12.99%. Thus, the price per service, which will go towards Credit Corp Group, is $359.

2. Wallet Wizard: Individuals will pay a regular payment of $475.22 per month at 47.8%. Thus, the price per service, which will go towards Credit Corp Group is $702.65

3. Clear Cash: Individuals will pay a regular payment of $475,22 per month at 47.8%. Thus, the price per service, which will go towards Credit Corp Group is $702.65

Credit Corp Group has many variable factors, which may be increased or decreased. These factors may include:

1. Computer software2. Company bills eg. Electricity 3. Leaseholdship4. Office supplies

The list goes on, however, these were just a few examples. If we assume that Credit Corp Groups variable costs are increased and influence the cost of products by 1%, their margin costs will be decreased as follows:

1. Credit 2u: 0.01* $359 = $3.592. Wallet Wizard: 0.01 * $702.65 =$7.0263. Clear Cash: 0.01 * $702.65 =$7.026

Therefore the contribution margin which equals to SP (sales price) – VC( variable cost) is:

1. Credit 2u: $359-$3.59 = $355.412. Wallet Wizard: $702.65-$7.026 = $695.633. Clear Cash: $702.65 - $702.026 = $695.63

The table below shows a summary of the calculations above:

Credit 2U Wallet Wizard Clear CashSales Price $359 $702.65 $702.65Variable Cost $3.59 $7.026 $7.026Contribution Margin $355.41 $695.63 $659.63

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Contribution Margin Discussion

I believe the contribution margin allows managers to determine how much of a product/service contributes towards covering fixed costs. Once these costs are paid, it tells us how much profit is generated. Furthermore, emphasizing the contribution margin makes income statements more useful in decision-making as you can clearly determine how much is contributing towards covering your expenses. The contribution margins calculated above for Credit Corp Groups three services are all greater than zero, therefore, contributes positively towards fixed costs and profit. The contribution margin for Credit 2u is almost half of Wallet Wizard and Clear Cash’s. This is mainly because the sales price and variable costs of Wallet Wizard and Clear Cash are significantly higher than those of Credit 2u. The reasons for Wallet Wizard and Clear Cash’s extremely high and seemingly unrealistic sales price is due to their 47.8% interest rate in compared to Credit 2u 12.99% interest rate. The reason why they charge this high interest rate is because they lend money to individuals who do not fulfill the requirements of borrowing money/ taking out a loan from other financial institutions. Wallet Wizard and Clear Cash have these high rates as their additional smart loan fees which include an annual fee, service fee, credit limit increase fee and manual payment fee is all $0. Furthermore, the application to borrow money from both Wallet Wizard and Clear Cash is a very quick service as individuals may apply for a loan and receive their cash within 60 minutes of approval if the contract has been accepted. This short period of time for approval clearly identifies that both financial institutions do not refer to previous credit histories in great depth such as other major banks in Australia including Wespac, NAB, ANZ and Commonwealth Bank. Additionally, they believe everyone should have the ability to get fast cash. On the contrary, Credit 2U who has an interest rate of 12.99% carefully look through financial situations individuals are in and their income to provide a possible repayment option. Therefore, those who are unable to borrow money from other instructions due to negative credit history may borrow from either Wallet Wizard or Clear Cash. Additionally, individuals who do not have a full time job, for example, a student who is over the age of 18 working at a local supermarket, are not able to borrow money from large banks, as they do not have a full time secure, permanent job. Therefore, these students may take out a loan at Wallet Wizard or Clear Cash, just at a higher interest rate. Additionally, Credit Corp Group has many variable factors that may be increased or decreased. These factors can be referred to in Credit Corp Groups financial statements and include company software, leaseholdship and so on. It was assumed that Credit Corp Groups variable costs are increased and influence the cost of products by 1%, their margins will be decreased. This was done in order to cover fixed costs (the factors). Furthermore, another reason for the high rates for Wallet Wizard and Clear Cash is because they lend money from other lenders and have to use a higher active interest rate in order to pay the loan they have and make a profit while being able to cover fixed costs of the company. Thus, it is not difficult to identify why there is such a difference between contribution margins.

Furthermore, there are a few reasons why it would be beneficial if Credit Corp Group provided various services with a range of contribution margins. Separating the costs allows customers to have a range of affordable finance products with market-leading fees and rates. Thus, it would give Credit Corp Group the ability to diversify their services. Therefore, it allows for a wider range for selecting an affordable and convenient repayment solution. Furthermore, the service with the highest contribution should not be the only one focused on because sometimes profits can be improved by reducing the contribution margin if fixed costs could be reduced by a larger amount. However, more commonly, the way to improve profit is to increase contribution margins as fixed costs are reduced and the rest is generated profit.

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Possible Constraints Discussion

Firms all around the world are faced with a number of constraints, which impact their decisions on what services/products they can provide to customers. For Credit Corp Group, who operate in regards to providing repayment plans and offers finance products with market-leading fees and rates, I believe the biggest constraint would be the basic business model of banking. This is otherwise known as the ‘cost of funding.’ The amount the financial institution must pay to borrow the reserves required to make loans can be risky. Credit Corp Group must acquire the regulatory capital to back the loan, and this capital can be expensive. Furthermore, they would face administrative costs in making the loan and bankers must be paid. Additionally, numerous taxes and government fees apply. Another interest rate risk that Credit Corp Group face is attempting to hedge by borrowing funds with the same duration of the loan they are making, which increases the banks cost of funding, or creating floating rate loans.

Furthermore, Credit Corp Groups services must price in the credit risk of creating a loan. This risk is because some borrowers can walk away because the loan becomes undervalued or cash flow decreases short of what is needed to make the loan. Moreover, credit risk depends on the individual customer and the current economic position. For example, rising unemployment, decrease in consumer demand, manager plausibility of business plans can be huge credit risks.

Also, skilled labor may be another constraint. Many services Credit Corp Group provides involve numerous functions, which only individuals with expertise, skill and qualifications can take on. Therefore, an unskilled labor force may negatively affect the company, as difficulties with negotiating with customers would arise. Thus, Credit Corp Group would need to figure out how they could provide each service based on the skilled staff employed.

Lastly, another constraint is competitors. There are many financial institutions that provide repayment plans and offers sustainable, affordable finance products with market-leading fees and rates. Therefore, careful decisions on interest rates must be implemented.

STEP 8: RATIO ANALYSIS

Before commencing step 8, seeing 17 marks on the criteria sheet frightened me. However, as I started to complete the spreadsheet I felt more at ease with the ratios and I flourished my knowledge into the world of accounting by a drastic amount. I have always loved numbers as a child, however, growing up and grasping on calculations and equations had usually confused me. Now, I can confidently admit that I completed Credit Corp Groups calculations with enthusiasm. Moreover, I was highly intrigued to learn the meaning behind each important figure as I questioned numerous sections of the ratios. Accounting if definitely one of the first subjects I have take to really enjoy mathematical tasks. As I reflect over the 12 weeks an all of the steps submitted, I was blown away to see that all of these challenges and approaches to learning has definitely paid off. I learnt copious amounts of information through online communications including peer wise and group discussions; however, I believe the spreadsheet really enhanced my knowledge. Additionally, the key facts and questions I asked myself throughout doing these steps further increased my knowledge and allowed me to understand every day life and what is really happening in the world around me and why specific things are the way they are. I never realized that I could draw myself into such deep learning and be so intrigued in numbers and calculations, especially

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ratios. I also learnt the importance of numerical values and how they have this enormous ability to really shape a company.

The numerous time spent on step 8 was definitely worth it. Yes, it is undeniably the most difficult step, however, watching the recorded lectures and discussing with my peers was of great help. Without this social encounter and being able to really discuss specific components of my assignment, I wouldn’t be where I am currently with this subject and I wouldn’t be as confident to submit my work. As soon as I applied the correct data to each equation, I was able to complete my ratio calculations quite quickly. Additionally, I enjoyed reading through multiple blog posts written by other students as it put me to ease when I began realizing that they had the same issues as me with specific steps or certain components. I must admit, Google was also much help when I didn’t understand some sections, although I loved the chapter study guides.

Ratios Commentary

1. Profitability ratios

From my understanding, profitability ratios measure the efficiency with which Credit Corp Group turns business activity into profits. The profitability ratios for Credit Corp Group can be seen in the table below.

Profitability Ratios 2016 2015 2014 2013

Net Profit Margin Net profit after tax/Sales 20.3% 20.1% 20.0% 22.4%

Return on Assets Net profit after tax/Total assets 11.6% 14.0% 15.3% 17.7%

We can see that Credit Corp Groups net profit margin has been quite consistent, however, it decreased from 2013 to 2014 by a slight 2.4%. On the other hand, from 2014 to 2016 it has been steadily increasing by a very little percentage with a 0.1% increase from 2014 to 2015 and a 0.2% increase from 2015 to 2016. This higher net profit margin shows that Credit Corp Group is quite efficient at making sales into actual profit. Therefore, the company had a sound percent after deducting all expenses. Therefore, I believe these percentages are very healthy profits especially as their net profit after tax increased from 2013 to 2016 and their sales had also increased from 2013 to 2016. Additionally the decrease in net profit margin from 2013 to 2014 may indicate that Credit Corp Group had high fixed costs, high variable costs or both. Therefore, increasing the sales volume could help them cover the high fixed costs but would only make things worse with the increased variable costs. If Credit Corp Group had a high sales volume within this period of time in 2014; they may have increased prices to increase the profit margin to outweigh the loss of sales.

On the other hand, the return on assets (ROA) had decreased from 2013 to 2016. From my understanding, return on assets calculations shows us how profitable a company is relative to its total assets and it gives us a clear indication on how efficient a company’s management is in using assets to generate specific earnings. Therefore, the higher the ratio the better the company is at using their assets to gain their maximum possible value. As Credit Corp Groups ROA decreased from 2013 to 2014 by 2.4%, from 2014 to 2015 by 1.3% and from 2015 to 2016 by 2.4%, this is a clear indicator that the company is

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facing some troubles. Trying to achieve sales grown usually means upfront investments in assets, which includes accounts receivables, inventories or facilities. Therefore, a decrease can leave an organization very stressed and overinvested in assets that cannot be sold to pay its bills. I found this quite interesting as Credit Corp Group deals with providing the best possible repayment solutions. Because Credit Corp Group deals with repayments, this could lead to a huge financial disaster. Return on assets can tell investors whether or not the company’s performance has become stacked up. If Credit Corp Group is taking out less from its investments then what it is paying to finance those investments that are not a positive future for the company. Moreover, this decrease in ROA may be caused by an overcapacity. Although there are strong profit margins, a price cut could potentially raise the market share and the company’s capacity utilization causing this decrease. Furthermore, Credit Corps fixed costs may have been too high, and they should definitely sell of the assets they no longer need to boost ROA by increasing the net income and reducing the average assets.

After analyzing Credit Corp Groups situation, I was intrigued to see what other company’s profitability ratios were like. After discussing with students I realized the return on assets is all different for everyone and depends on whether the issue is due to cash in the back, property, equipment or even inventory. Many peers had different relationships for their ROA and net profit margin, so I learnt a lot in regards to my company and theirs. Moreover, I learnt the difference between low and high ROA and profit margins.

2. Efficiency ratios

Now, moving onto the efficiency ratios. I believe efficiency ratios are defined as Credit Corp Groups ability to really manage its liabilities effectively while using its assets. When I started completing this component in the spreadsheet I was very confused when it came to days of inventory, as Credit Corp Group has no inventory. This is because they have no goods in stock and are purely a service company who provides repayment plans and offers sustainable, affordable finance products with market-leading fees and rates. This is the reason for N/A in each column. The efficiency ratios for Credit Corp Group can be seen in the table below.

Efficiency Ratios 2016 2015 2014 2013

Days of Inventory Inventory/Av. daily cost of goods sold

N/A N/A N/A N/A

Total Asset Turnover Ratio

Sales/Total assets 0.57 0.70 0.77 0.79

The total asset turnover ratio was equal to the sales divided by the total assets. Credit Corp Groups total asset turnover ratio decreased from 2013 to 2014 by 0.02, from 2014 to 2015 by 0.07 and from 2015 to 2016 by 0.13. I was intrigued to find out why there is this decrease and at first it didn’t look so good to me because the higher the asset turnover ratio, the more efficient a company is. Thus, Credit Corp Group has been slowly becoming less efficient. I found it very strange how its total asset turnover ratio was decreasing because Credit Corp Groups revenue is increasing. Then it occurred to me that they may be overinvesting in company assets. Thus, they have either added unnecessary capacity in fixed assets or they just aren’t using most assets. In Credit Corp Groups case, they may have cash sin the bank or

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inventory that is just not selling. Therefore, to increase this low total asset turnover ratio, Credit Corp Group can make some changes by beginning to use more assets or limiting purchases of inventory. Furthermore, they can increase sales and not purchase new assets that are not needed.

3. Liquidity Ratios

I was very interested to analyze the liquidity ratios as Credit Corp Groups increased from 2013 to 2014 by 0.75, 2014 to 2015 by 1.58 and from 2015 to 2016 by 0.68. The reason for being so highly intrigued in this section was because most of my peers who I have discussed with had a decrease in the current ratio. The liquidity ratios for Credit Corp Group can be seen in the table below.

Liquidity Ratios 2016 2015 2014 2013

Current Ratio Current assets/Current liabilities 5.55 4.87 3.29 2.54

From my understanding, a liquidity ratio is between the liquid asset of Credit Corp Group and other liabilities from a bank or another institution. I was interested in this because Credit Corp Group is itself, a financial institution where individuals can go to get repayment solutions. However for Credit Corp Group to provide these loans and repayment solutions, they also have to borrow the money from somewhere. The individuals I discussed this with, their company had a decrease from 2013 to 2016 because they have the ability to pay its short-term obligations. Thus, each of their companies are making a sufficient amount, or more then enough for its operations to fund itself. Thus, they can easily pay off the liabilities that their firms face. This got me thinking about Credit Corp Group and I immediately assumed this decrease in current ratios meant they are not doing so good. Therefore, the first conclusion I was drawn to was that Credit Corp Groups ability to pay off its short term debt obligations is not doing as required, especially as it is a financial institution.

4. Financial Structure Ratios

I found the financial structure ratios to be quite intriguing. Especially as the figures in my spreadsheet thoroughly increased for the debt/equity ratios but decreased for the equity ratios. The financial structure ratios for Credit Corp Group can be seen in the table below.

Financial Structure Ratios 2016 2015 2014 2013

Debt/Equity Ratio Debt/Equity 66.4% 36.0% 24.1% 6.8%

Equity Ratio Equity/Total assets 54.0% 65.7% 70.4% 77.2%

The first thing I noticed was the huge increase from 2013 to 2016 in the debt/equity ratios. Basically, the role of this ratio is to compare Credit Corp Groups debt with its equity. There was a 17.3% increase from 2013 to 2014, an 11.9% increase from 2014 to 2015 and a huge 30.4% increase from 2015 to 2016. These

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figures shocked me at first as the previous ratios had only minor decreases or increases. The reason for this increase is because Credit Corp Groups liabilities are increasing. Furthermore, there was a decrease from 2013 to 2016 in the equity ratio. From my understanding, an equity ratio is used to discuss a company’s financial leverage. The decrease shows that Credit Corp Group are being financed by the shareholders equity in comparison to the creditors. This is self explanatory and understandable, as Credit Corp Group must be financed by shareholders such as banks in order to function and provide customers loans and repayable options.

5. Market ratios

At first I found it difficult to grasp an understanding on Credit Corp Groups market ratios. The market ratios show the measure of investor response to owing a company stock and also the cost of issuing stock. Credit Corp Groups market ratios can be seen in the table below.

Market Ratios 2016 2015 2014 2013

Earnings per Share (EPS) Net profit after tax/nos. of issued

ordinary shares

0.98 0.83 0.75 0.70

Dividends per Share (DPS)

Dividends/number of issued

ordinary shares

-0.45 -0.42 -0.37 -0.36

Price Earnings Ratio Market price per share/earnings

per share

12.29 14.67 11.54 13.53

I was very relieved to see that the earnings per share matched my earnings per share in the financial statement because in my first attempt they didn’t. This happened because I did not chose the correct figure in the annual report initially, but when I found the correct number of issued ordinary shares I felt very comfortable with continuing the rest of the excel spreadsheet. The first thing I noticed was an increase in earnings per share from 2013 to 2016. There was an increase from 2013 to 2014 by 0.05, from 2014 to 2015 by 0.08 and from 2015 to 2016 by 0.15. This is an important positive component to Credit Corp Group as a higher EPS means that they will have higher earnings and a strong financial position. As Credit Corp Group is a financial institution, these increasing EPS figures shows customers that it is a reliable company to invest money in. Furthermore, I was confused as to why Credit Corp Groups dividends per share were all negatives. Then I figured out why. Credit Corp Group has negative figures for DPS as the shareholders pay dividends to the company. Moreover, the price earnings ratio shows that we can expect our investment to be paid back in 12.29 years if we invest in Credit Corp Group.

6. Ratios based on reformulated financial statements

Ratios Based on Reformulated Financial Statements 2016 2015 2014 2013

Return on Equity (ROE)

Comprehensive income/shareholders

21.45% 21.33% 21.80% 22.86%

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equity

Net Borrowing cost (NBC)

Net fin expenses after tax/net

financial obligations

-1.73% -2.66% -5.03% -11.69%

The return on equity (ROE) is equal to the comprehensive income divided by the shareholders equity. An increasing return on equity means that the company can increase its potential to make profit without using as much capital. Therefore, since Credit Corp Groups ROE decreases by a very minor amount from 2013 to 2016, this may not be a problem, however, on the other hand if it decreases too much this is usually a problem.

Summary of ratios

Overall, I found that calculating the ratios was fairly simple. After discussing this process with my lecturer and peers during tutorials, I was able to fully grasp on the concept. I thought the most helpful resource was the echo lectures and I found it so useful as I could go back and re-watch Marias excellent explanation on each step. Furthermore, after completing a draft of my spreadsheet, I used the Facebook group to ask for feedback. I really appreciate the use of online communications, as the feedback received from peers was endless. Additionally, providing students with feedback on their step 8 specifically, flourished my overall accounting knowledge in regards to the concept of ratios. Moreover, after taking the time and effort to further investigate into Credit Corp Group, I felt more confident about my analysis and what they do exactly as a firm.

Throughout the process of completing my assignment I had many discussions with other students in regards to their spreadsheet. Firstly, when talking to Tai Anh Ngo in the accounting tutorial, I was surprised to see that his company was not making any profits until we both realized that this was due to it being very new and beginning to operate. When our companies were put into comparison, Credit Corp Group clearly had greater ratios. This was definitely self-explanatory. Likewise, while discussing with other peers in class, I felt as though I had a very tough concept, as my company did not produce an actual physical product like theirs. It was interesting to compare the different ratios in regards to financial side of accounting, as my company is a financial institution that borrows money from elsewhere to be able to provide loans to customers. Additionally, some companies had a positive relationship for ratios where I would have a negative relationship or vise versa. By comparing these, I immediately new if it would be a positive of negative outlook on my company. For example, I was very interested to analyze the liquidity ratios as Credit Corp Groups increased from 2013 to 2014 by 0.75, 2014 to 2015 by 1.58 and from 2015 to 2016 by 0.68. The reason for being so highly intrigued in this section was because most of my peers who I have discussed with had a decrease in the current ratio. Additionally, with the efficiency ratios I was confused, as I had no inventories in compared to other peers firms who had firms who created actual products. As I discussed with peers I realized this was because Credit Corp Group have no goods in stock and are purely a service company who provides repayment plans and offers sustainable, affordable finance products with market-leading fees and rates, whereas, other firms were not.

Also, I got confused with the liquidity ratios as the individuals I discussed this with, their company had a decrease from 2013 to 2016 because they have the ability to pay its short-term obligations whereas mine was different. Furthermore, after analyzing Credit Corp Groups situation with profit ratios, I was

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intrigued to see what other company’s profitability ratios were like. After discussing with students I realized the return on assets is all different for everyone and depends on whether the issue is due to cash in the back, property, equipment or even inventory. Many peers had different relationships for their ROA and net profit margin, so I learnt a lot in regards to my company and theirs. Moreover, I learnt the difference between low and high ROA and profit margins.

Drivers of economic profit commentary

The table below provides information in regards to Credit Corp Groups economic profit between 2013 and 2016.

2016 2015 2014 2013

Economic Profit

(RNOA – cost of capital) x net operating assets (NOA)

12,783.2 15,959.6 16,971.2 18,090.0

RNOA Return on Net Operating Assets

13.59% 16.63% 18.61% 22.38%

NOA Net Operating Assets (in $’000s)

355,934 240,569 197,009 146,123

Profit Margin

Operating income after tax/sales

21.34% 20.96% 21.09% 22.97%

Asset Turnover

Sales/Net operating assets (NOA)

0.64 0.79 0.88 0.97

Economic profit is a measure of which a firm has been able to add value over and above its cost of capital during a period. Furthermore, it is the difference between the revenue, which is earned from the sale of an output, and the opportunity cost of the inputs used. It is measured using this formula: (RNOA – cost of capital) x net operating assets (NOA). The main contents in economic profit are return on net operating assets, cost of capital and net operating assets. Furthermore, the percentage of WACC plays a role in this. However, as I couldn’t find supporting evidence on what percentage Credit Corp Group uses, I assumed that the WACC was 10%. The purpose of using WACC is to assess the amount that investors as a group need to make their investment worthwhile for using the invested capital.

From 2013 to 2016, economic profit has decreased. It decreased from 2013 to 2014 by 1118.8, from 2014 to 2015 by 1011.6 and from 2015 to 2016 by 14681.4. Because these numbers are all positive, this is an indicator that tells us that Credit Corp Group covered its cost of capital and is doing quite well for economic profit. Credit Corp Group uses the economic profit to determine how profitable their projects are. Furthermore, it shows how good the management performance is and proves how businesses are truly profitable when wealth is created between their shareholders. Additionally, it displays how Credit Corp Group should make returns at a rate, which is above the cost of capital. After discussing with peers about our economic profits, we all discovered from our companies that PM due to OI was a main reason as to why some companies were increasing economic profits or making a loss. This definitely did affect Credit

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Corp Group. Additionally, the profit margins are looking good for Credit Corp Group as it is said that a big company should have around 15%-20%.

Furthermore, there was a decrease in asset turnover from 2013 to 2014 by 0.09, from 2014 to 2015 by 0.09 and from 2015 to 2016 by 0.15. The asset turnover was calculated by taking sales and dividing it by net operating assets. Additionally, the asset turnover is used as a measurement tool to identify the efficiency of a company’s use of assets to generate sales revenue or income to the company. The higher the asset turnover rate, the more efficient the company. Thus, it is evident that Credit Corp Group are lacking in efficiency over the years.

Lastly, I enjoyed comparing my company’s economic profit to other students. Overall, I believe Credit Corp Group as a company is doing quite well as they can cover their cost of capital. However, due to a decrease over the years, this indicates that the company is losing efficiency.

STEP 9: CAPITAL INVESTMENT DECISION

Credit Corp Group is considering expanding their current operation to continue advancing the many provided services involving repayment plans. The expansion will further develop the range of sustainable, affordable finance products with market-leading fees and rates while giving the company a greater profit. Currently, they are considering two investment pathways: improving property and plant or purchasing computer software. Presently, Credit Corp Group do have a large variety of computer software, however, as technology is consistently improving, new computer software may be a great benefit to the company. Furthermore, Credit Corp Group may wish to invest in property and plant to initiate high profit margins. The cost of land, cost of buildings, cost of leasehold improvement, labor cost, test run cost and so on, all fall under the category of property and plant

For investment opportunity 1, the purchase of the computer software is $1 .7 million and has a life expectancy of 10 years. From this point onwards, Credit Corp Group will need to consider purchasing more advanced improved technology to continue operating and keeping up the competition with other financial institutions. Therefore, the residual value for the computer software after the 10-year period is estimated be $250k. Additionally, for investment opportunity 2, improving property and plan is expected to generate economic benefits for the company in 10 years. The cost of property and plant would be $12 million with a life expectancy of 10 years. The residual value of this is the estimated amount Credit Corp Group would receive from disposing the asset after deducting the estimated costs of disposal. Thus, the residual value from property and plant after 10 years is estimated to be $800k.

The cash flows generated from both investment opportunities by conducting services would be predominantly comprised of customers taking loans from the financial institution services and the total interest payable that goes straight to Credit Corp Groups revenue, less operational costs which include staff wages, inventory purchases, rent or lease payments, property taxes, office supplies and maintenance of equipment. Credit Corp Group investment would be made on the 30 th of June 2018 and the estimated future cash flows are expected to be received on the 30 th of June of each year. In the table below, the original cost, the estimated life, residual value and estimate future cash flows of each investment opportunity are evident. All amounts are displayed in Australian Dollars AUD. Furthermore, assuming a rate of return/discount rate/WACC are all 10%.

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In Australian Dollars ($)Computer Software Property and Plant

Original Cost -$1,700,000 -$12,000,000Estimated Useful Life 10 years 10 yearsResidual Value $250,000 $800,000Estimated Future Cash Flows30th June 2018 (time period = 1 year) $250,000 $800,00030th June 2019 (time period = 2 year) $250,000 $900,00030th June 2020 (time period = 3 years $300,000 $900,00030th June 2021 (time period = 4 years) $300,000 $900,00030th June 2022 (time period = 5 years) $300,000 $900,00030th June 2023 (time period = 6 years) $350,000 $900,00030th June 2024 (time period = 7 years) $350,000 $900,00030th June 2025 (time period = 8 years) $350,000 $950,00030th June 2026 (time period = 9 years) $400,000 $950,00030th June 2027 (time period = 10 years) $400,000 $1,000,000

By using the information above, I have come to a conclusion with three separate analyses to consider when making a decision to what investment would be the most beneficial to Credit Corp Group. The first analysis, Net Present Value (NPV), is the difference between the present value of Credit Corp Groups future cash flows and the initial investment. Therefore, it is used to compare the amount of funds, which are invested with an expected future cash flow return by taking away the expected returns to a rate that is suitable. The second analysis is the payback period, which determines the length of time until the initial investment is recovered. Finally, the third analysis is the Internal Rate of Return (IRR), which is a discount rate of what makes NVP equal to 0. Furthermore, it provides the percentage on the expected rate of return in regards to the initial investment while taking into consideration the value of future cash flow.

The results for the investment opportunities are listed below.

Investment Opportunity 1 – Computer Software

1. NVP: Based on the calculated results from the company spreadsheet, Credit Corp Group would expect to receive $214,764.33 over the initial investment cost.

2. IRR: The investment opportunity for computer software would have an IRR of 13%. This shows a positive indication for Credit Corp Group as it explains that the investment would make a profit based on the estimated cash flows.

3. Payback period: The length of time until the initial investment is covered will be approximately 5 years and 10 months.

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Investment Opportunity 2 – Property and Plant

1. NVP: Based on the calculated results from the company spreadsheet, Credit Corp Group would expect to receive $216,500.76 over the initial investment cost.

2. IRR: The investment opportunity for property and plant would have an IRR of 11%. This shows a positive indication for Credit Corp Group as it explains that the investment would make a profit based on the estimated cash flows.

3. Payback period: The length of time until the initial investment is covered will be approximately 4 years and 5 months.

Investment Decision

If you refer to the spreadsheet, you can see from both analyses that the two investment opportunities both obtain positive results. Moreover, when comparing the two IRR for both investments, 13% and 11%, we can see that there is an insignificant difference. Furthermore, both payback periods are under 10 years and are very close to one another as they were 5 years, 10 months and 4 years 5 months. The closeness between the two-payback periods should not impact the final decision on investments, as the value of money was not implemented.

Overall, when looking at the IRR and NPV and assuming that the cash flows are correct, it is clearly shown that investment opportunity for property and plant will obtain more profit for Credit Corp Group as the NVP was $216,500.76 in comparison to the computer software investment opportunity where NVP was $214,764.33. I had initially expected this, as the returned cash flow and residual value were greater for property and plant in comparison to the computer software. It is also evident that both values of NVP were extremely similar for each investment opportunity. Additionally, I found it highly intriguing how different rates of IRR could lead to such similar results for NVP.

Due to these similarities and positive results for both investment opportunities, I believe Credit Corp Group should invest in the computer software, property and plant. These opportunities provide multiple benefits for the company and can potentially lead to a high profit margin. Furthermore, these investments play a crucial role to being complementary with one another and I believe both are quite feasible for the company to undertake without majorly affecting them. Additionally, both investment opportunities provide much strength for the company. The main strength is that through the use of new computer software, Credit Corp Group will keep up with advances of technology which will thoroughly help them with expanding and further developing the range of sustainable, affordable finance products with market-leading fees and rates while giving the company a greater profit too. Another strength is that investing in property and plant will benefit the building of the company. Furthermore, labor cost will be further invested in, thus, workers will be given a higher pay, which will give them higher motivation to work.

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This contributes to the final outlook on the firm and promotes the best possible service of providing repayable loans. However, Credit Corp Group will face some weaknesses such as managing a significant amount of funds to invest in the computer software, property and plant. Furthermore, a change in interest rates can change the profits for Credit Corp Group as they can either decrease or increase, affecting the companies operation and the assumption of their future cash flow and residual value. However, the positive outlooks of both investment opportunities outweigh the weaknesses.

STEP 10: FEEDBACK

The implementation of feedback was incredibly useful throughout this assignment as it was highly supportive and had the ability to increase my knowledge into the world of accounting. I felt more at ease communicating with such an open academic social basis with others who were experiencing the same or similar difficulties. Thus, through online communication, constructive learning was implemented. Additionally, I had developed my own knowledge while providing other students with feedback. Furthermore, the feedback I had received allowed me to feel confident to submit the work I had produced. Therefore, this is definitely my favorite component of the assignment.

Feedback To: Sarah Zillman

My Comments

Step 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

Sarah, I enjoyed reading through your step 7 to 10 as I found it highly intriguing!

Firstly, I loved how you displayed your three products, providing pictures besides them. The reasoning behind your product selection was very interesting to read because I didn’t know that your company produces both still and carbonated drinks.

Furthermore, you presented your costs very clearly but it would be great if you include the calculations behind the contribution margins too. Moreover, when explaining these figures make sure you include the section written on the step 7 sheet: Why not only sell the product with the highest contribution margin? If you do some research about it I’m sure you can find plenty information as your company is very known for producing Pepsi Max.

Your paragraphs on the constraints were very well structured and are very well done.

Step 8

Calculation of ratios

Your calculations are very well done, and the spreadsheet is clearly presented.

Your commentary is also well presented; I enjoyed reading the comparison of your company, Britvic, and an explanation of its ratios. I was intrigued to read the comparison to other firms. You should expand on this section; it shows off your knowledge on accounting

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Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

very well. You can also include figures from the spreadsheet for supportive evidence.

Furthermore, some sections of the ratios were not present in your commentary. I would’ve loved to see you implement information on your WACC.

Make sure your spelling is correct! I found a few errors here and there, but not a big deal

Other then this, very well done on this step.

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

The way you wrote about which investment decision for your firm is best was very clear and easy to read through. Definitely one of the first assignments I have read and able to understand the calculations behind the payback period, NVP and IRR.

Additionally, your calculations seem correct which is great!

I also enjoyed reading through your recommendations and the strengths of option 2 and why it is a better decision. However, it would have been interesting if you included some negative aspects and why they are weaknesses.

Step 10

Individual feedback with other students

You have provided very in-depth feedback to other students and honestly gave an opinion. Excellent effort here.

Overall ASS#2

Overall Feedback

Additional Notes / Questions

Sarah, I thought your assignment overall was very well done! I found it cohesive, well structured and easy to follow through. A few minor things you can change, and that’s about it I think its ready for submission. Keep up the good work

Feedback To: Angela Engelbrecht

My Comments

Step 7


Angela, the first thing I noticed was you have a great blog! Very up to date.

First of all, your products and the selling price for each

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of them were clearly identified. You should include the calculations behind the contribution margins to make your assignment even easier to follow through.

I have no comment for your commentary as you had an excellent analysis! You included important figures and explained them very well. I really liked how each paragraph was dedicated to each product. Excellent structure!

Furthermore, your identification of constraints was perfectly done. One of the best I have read so far. Keep up the great work.

Step 8





Your spreadsheet looks correct. Your presentation of the ratios was also very clear. Furthermore, the commentary you provided in regards to your ratios was completed very well and the implementation of graphs is a great way to emphasize the knowledge behind these ratios.

You could include information regarding how you calculated the ratios. Did you have any difficulties understanding some sections of the ratios and how they link to your firm? It would be great to include your opinion in regards to this.

Overall, this step was very well done!

Step 9




Your developed capital investment decision for your firm was very cohesive and easy to read. You justified every statement, which is excellent to see. It really shows off your knowledge in regards to your company.

I found it highly interesting to see that you chose both investments instead of one as majority of the students chose 2. But with regards to your supporting statements it sounds like a very justified option.

Lastly, you should include the outcomes of NPV, IRR and the payback period for all decisions mentioned in a short summary.

Step 10


N/A

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Overall ASS#2

Overall Feedback


Angela, reading through your assignment really enhanced my knowledge in regards to assignment 2! I enjoyed reading through your work and I believe you’re on the right track. Keep up the good work

Feedback To: Sahar El-Sayed Ahmad

My Comments

Step 7





Sahar, you have identified your 3 products clearly, however, I am unsure where you have obtained your sales price and variable costs. If you provide some information on this that would be great!

Your on the right track but this could be a great way to make the structure of your assignment a lot clearer:

State your 3 products, explain why you chose them.

State their sales price, and explain how you obtained them/where you got them from

Look on your company website and see if there are any variable costs, you might find something in your firms annual report if you look through the notes. If you can’t find anything then you could just guess a figure.

Calculate your contribution margin and include your calculations. It will make it easier for the marker to understand the reasoning behind these figures.

Start on your discussion and make sure you identify what the contribution margin actually is and then move onto your constraints. There are heaps of factors that could be constraints to your company, research them

Also, make sure you check your spelling and punctuation, keep up the good work.

Step 8


Your calculations look correct however, you could use a consistency check to make sure your RNOA is accurate.

Make sure important sections in your spreadsheet are bolded or put in italics so its clearer to read.

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I couldn’t find a discussion on the economic profit drivers with others. You should include some discussions you have had with other students about your firms and include how your firm differed to theirs. Additionally, make sure you identify your insights gained by breakup up your firms financial statements.

You are on the right track, well done.

Step 9




In regards to capital investment decisions, you did a great job in inluding figures however, make sure you support these figures with evidence and clearly present what your capital investment decisions are and their costs etc.

Furthermore, you should include the strengths and weaknesses of the payback period, NVP and IRR.

Step 10


You provided good feedback to other students. Well done.

Overall ASS#2

Overall Feedback


Overall, there are some errors you should fix, but they are only minor. Keep up with the good work and good luck

Feedback To: Kaylee Baldwin

My Comments

Step 7 Kaylee, I really enjoyed reading about your products and services especially because it has to do with clothes, I love Glassons! Other then that, the three

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products you chose to include were implemented very cohesively. The structure of this component was very well done.

The only thing that you could add in is the calculations behind each of the three contribution margins. Furthermore, it would be great to see information on contribution margins and what they actually are.

Overall, a very solid step 7. Well done!

Step 8





Your calculations look correct from what I can see, especially because you included an accuracy check, which is excellent effort!

The format of your spreadsheet is very clear and your commentary was very intriguing. It is great how you really put in the effort to discuss your understandings.

I found one error, however, it is only minor. When you compared RNOA figured to RNA, this should be ROA.

Overall, both components of your step 8 including the spreadsheet and commentary were completed to a very good achievement. Keep up the excellent work

Step 9




Your step 9 was presented very well. I really like how you clearly structured option 1 and option 2.

The calculations in your spreadsheet were very well done. I wasn’t able to find any errors here.

You presented very useful and important aspects to your step 9, however, I would of loved to see you expand on what the payback period, NPV and IRR actually are and why you feel they are both good options as investment opportunities.

Furthermore, make sure you discuss the strengths and weaknesses of your analysis! This is very important and is listed in the task sheet.

Step 10 You provided excellent feedback to others. Well done

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Overall ASS#2

Overall Feedback


Kaylee, you have put together a very solid and cohesive assignment. The information supporting your claims is excellent and well presented. Keep up the good work.

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